The shares of Chesapeake Energy Corporation, the second-largest producer of natural gas and the 12th largest producer of oil and natural gas liquids in the United States, had been downgraded to Underperform by John Freeman, an analyst at Raymond James. Mr. Freeman previously had a Market Perform rating on the stock.
Concerns on Chesapeake Energy’s balance sheet
In a note to investors, Mr. Freeman explained that he downgraded his rating on the stock because of his concern on the balance sheet of Chesapeake Energy and the bearish outlook for natural gas prices over the near-term.
The analysts also reduced his 2016 natural gas price estimate from $2.36 to $2.00 per million BTU. He also cut his long-term estimate from $2.75 to $2.50 per million BTU.
According to Mr. Freeman, the impact of the recent effort of Chesapeake Energy to exchange its new 8% senior secured lien notes due 2022 for certain outstanding unsecured notes due in 2017 and 2018 was “relatively weak.”
Based on his computation, approximately $385 million worth of notes due 2017 and 2018 participated in the exchange. He estimated that Chesapeake Energy has $2.5 billion in debt due by the end of 2017.
In November, Tim Rezvan, an analyst at Sterne Agee previously commented that second-lien loans are considered scarlet letters. His warning sent the stock price of the energy company down by 29% at the time.
Worst performer on the S&P 500
Chesapeake Energy is the worst performer on the S&P 500 last year as it was negatively impacted by the declining oil prices. Since July last year, crude oil has been trading below $50 per barrel. Currently, the WTI crude is trading around $36 per barrel, and the Brent crude is trading around a barrel.
The declining oil prices hurt the earnings and credit metrics of Chesapeake Energy. The company’s debt was recently trading at around $0.25 on the dollar. Based on its books, it has more than $11 billion in outstanding debt, and it is likely that it would struggle to meet its debt obligations. Last month, the two leading rating agencies downgraded its credit rating.
The energy company lost more than 76% of stock value in 2015. Its stock price declined from its highest level of $21.49 per share to as low as $3.56 per share over the past year.
Separately, Kyle Bass, the head of Hayman Capital Management, commented that now is the time to invest in the energy sector. In an interview with the Wall Street Journal, Mr. Bass said, “If you are going to allocate capital for the next three to five years, you should do it now” into the energy space over the next six months.
Chesapeake Energy benefited from his bullish comment on the energy sector. The company stock price rose more than 4% to $4.70 per share at the time of this writing, around 2:19 in the afternoon in New York today.